What is a Subscription Business Model? Definition and Examples

Do you have a business in which your customers must pay a recurring price at regular intervals to access your product or service? If so, you operate on a Subscription Business Model or Subscription Model.

The money your customers regularly pay your business is called a subscription. They typically pay a weekly, monthly, or annual fee.

For businesses, this model’s main advantage is that it allows you to leverage your customer relationships to create a steady income. While other parts of the business may fluctuate, your subscription income is relatively fixed (unless something awful happens and there is a mass exodus).

HubSpot has the following definition of the term:

“A subscription business model is a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for your products or services. Customers can renew their subscription after a certain period of time. This model allows you to leverage your customer relationships to create a steady stream of income.”

A Brief History

  • 17th Century

The subscription business model has roots that date back to 17th-century England. It first emerged in the publishing industry, where newspapers and magazines adopted a subscription-based approach to fund operations and ensure a steady income stream.

The first publication to charge a subscription fee was The Oxford Gazette (later known as The London Gazette) in 1665.

  • 19th Century

By the early 1800s, book publishers followed suit, allowing readers to subscribe for serialized releases, a practice popularized by authors like Charles Dickens in England and Alexandre Dumas in France.

  • 20th Century

In the 20th century, subscription models spread to other industries. The early 1900s saw utilities like electricity and water adopting subscription-based billing in the United States and Europe.

Book clubs using the subscription model began in the early 20th century, with the Book-of-the-Month Club launching in 1926 in the United States, offering members monthly selections of curated books.

In 1982, Columbia House popularized the “music club” subscription model, offering vinyl records and CDs for a monthly fee.

  • Since around 1990

The Internet, which began to become popular in the 1990s, transformed the landscape. Netflix, founded in 1997, pioneered media streaming subscriptions, while SaaS (software as a service) companies like Salesforce (1999) redefined software delivery with subscription pricing.

Today, the model is ubiquitous across industries—from media and software to e-commerce, health services, education, fitness, and entertainment—becoming a dominant force in global business.

Yearly calendar, a man at his desk, and a definition of a Subscription Business Model.
The subscription model has evolved considerably over the past 350 years.

Types of Subscription Models

Below are some different types of subscription models that businesses today use to provide value to customers:

  • Product-Based Subscriptions

Here, the customer receives physical products on a recurring basis.

Examples include subscription boxes like Birchbox or Dollar Shave Club, where subscribers receive curated products such as cosmetics or grooming items regularly.

  • Service-Based Subscriptions

Hundreds of thousands of companies around the world operate on this type of subscription model.

Examples include streaming services like Netflix or Spotify, software subscriptions such as Adobe Creative Cloud, or membership services like gym memberships.

  • Freemium vs. Paid Models

In the freemium model, the customer receives a basic version of a product or service for free, with the option to upgrade to a premium, paid version for more features or enhanced service.

Examples include apps like Dropbox, Zoom, Slack, Evernote, and Spotify.

Paid models, on the other hand, require a subscription from the outset, such as HBO Max, Disney+ or Apple Music. Many online newspapers, such as the New York Times in the US and The Times in the UK, require a subscription from the outset.

  • Hybrid Models

These combine both subscription services with one-time purchases, allowing customers to choose between a recurring subscription and buying individual items.

Amazon Prime is a notable example. As a member, you receive additional benefits like free shipping. Non-subscribers, however, can still make one-time (one off) purchases.

The Subscription Business Model is Huge

The subscription business model is enormous and growing rapidly worldwide. In 2024, the global subscription economy is projected to exceed $1 trillion, with continued strong growth across multiple sectors.

Subscription-based e-commerce alone is expected to reach $157.54 billion by the end of 2024. Experts forecast that it will exceed $310 billion by 2029.

Additionally, specific segments like the *subscription box market are forecast to grow to $105.4 billion by 2032.

* The Subscription Box Market refers to a business model where consumers receive curated packages of goods, typically on a recurring basis, such as monthly.

In the United States, nearly three-quarters of American consumers are subscribed to at least one service, reflecting the widespread adoption of this business model.

The subscription e-commerce market is currently growing at an amazing pace – 65% per year. It is one of the fastest-growing business models globally.

Worldmetrics.org says the following about the global subscription industry:

“Hold on to your wallets, folks, because the subscription industry is taking over by storm! With global subscription revenues soaring past the $1 trillion mark, it seems like everyone and their grandmother is signing up for some kind of recurring service these days.”

Ten largest subscription based companies globally plus their annual revenue.
Most of these companies are relatively young, with the exception of The New York Time and The Walt Disney Company.

Benefits of Subscription Business Models

  • Predictable & Recurring Revenue

Regular payments from subscribers create a steady, predictable cash flow for your business.

  • Improved Customer Retention & Loyalty

Subscriptions foster long-term relationships, making it easier to keep customers engaged. Brand loyalty is a common feature of subscription businesses.

  • Higher Customer Lifetime Value (CLV)

Subscribers typically spend more over time, increasing their overall value to the business.

  • Demand Forecasting & Inventory Management

The predictable nature of subscriptions makes it easier for you to plan and manage stock more efficiently.

  • Lower Customer Acquisition Cost (CAC)

Once acquired, subscribers provide ongoing revenue, spreading the initial acquisition cost over a longer period.

  • Enhanced Customer Insights

Subscription models enable you to gather valuable data over time, allowing you to offer more personalized services. This data also helps ensure that your marketing efforts are better targeted and more effective.

  • More Opportunities for Upselling & Cross-Selling

Upselling occurs when you encourage a customer to buy more expensive items, upgrades, or other add-ons. Cross-selling occurs when you offer your customer additional, complementary products or services.

  • Better Cash Flow Management

Predictable income streams simplify budgeting and cash flow planning.

  • Flexibility In Pricing Models

With a subscription business, you can offer various pricing options, such as monthly, yearly, or freemium. This allows you to attract different customer segments.

As with most things in life, there are both advantages and disadvantages. Let’s explore some of the key challenges that subscription business owners may encounter.

Challenges of Subscription Business Models

As with most things in life, there are both advantages and disadvantages. Let’s explore some of the key challenges

  • Customer Churn & Retention Issues

Your aim is to keep your customers subscribed for the long term. This can be challenging. If you do not deliver what they expect, your * churn rate will probably rise.

* Churn rate is the percentage of subscribers who unsubscribe over a month or year. Your retention rate is the opposite; the percentage of subscribers who stay with you.

  • Cost of Acquiring & Maintaining Customers

The cost of customer acquisition (CAC) can be significant, and maintaining ongoing relationships requires constant investment in customer service and support. Fortunately, with recent advancements in artificial intelligence and chatbots, offering 24/7 customer support is becoming a reality for small businesses.

  • Saturated Markets

If you were an early adopter of the subscription model in your industry, competition may have been minimal when you started.

However, as subscription models have become more widespread, today’s market is far more competitive.

As a result, you’re likely to face fiercer competition today, making it harder to achieve the same returns on your marketing investment as you did in your early days.

  • Scaling Operational Logistics

As subscription businesses grow, managing logistics, such as inventory, supply chain coordination, order fulfillment, and timely deliveries, can become more complex and costly.

  • Managing Customer Expectations

Your subscribers will likely expect high levels of personalization and flexibility, which can be difficult to scale while maintaining profitability.

Popular Industries Using Subscription Models

The subscription business model has come a long way since its early days in the seventeenth century. It now exists in many different industries.

Below is a list of ten industries along with example companies:

  • Media and Entertainment (Netflix, Spotify, BBC iPlayer)
  • E-commerce (Amazon Prime, ASOS, Zalando)
  • SaaS (Software as a Service) (Salesforce, Adobe, SAP)
  • Health and Wellness (Peloton, HelloFresh, Gymshark)
  • Beauty and Personal Care (Birchbox, Glossybox, IPSY)
  • Education and Learning (MasterClass, Babbel, Coursera)
  • Fitness (ClassPass, Freeletics, Fitbod)
  • Food and Beverage (Blue Apron, Gousto, Nespresso)
  • Gaming (Xbox Game Pass, PlayStation Plus, Nintendo Switch Online)
  • News and Publications (The Washington Post, The Economist, The Australian)

Starting Your Own Subscription Business

  • Define Your Product Or Service

If you are thinking of setting up a subscription business or converting your current one, you should start by defining your product or service offering and structure your model for recurring revenue.

  • Your Target Audience

Choose the right niche by identifying a gap in the market and researching your target audience to ensure your offering meets their needs.

  • Pricing and Costing

Next, establish a pricing strategy that provides value to customers while covering costs. Offer flexible billing cycles (monthly or yearly) to attract more customers.

It is crucial to get your costing right. Many businesses around the world have failed because their owners miscalculated costs, leading to losses.

  • Subscription Platforms

Finally, use platforms like Shopify or Stripe to automate subscription management, billing, and customer support. You will then be able to streamline operations as you scale.

Subscription Business Models Tomorrow

Will the subscription model continue to expand, both within each industry and into new ones. Most people think so. According to recent trends and innovations, there will be more subscribers in the future than there are today.

Customization and personalization are becoming essential, with companies using data to tailor services to individual preferences, making subscriptions more attractive.

  • B2B Subscriptions

Growth areas include *B2B subscriptions, where businesses offer recurring services to other companies, and industries expanding subscription options beyond traditional sectors like media and e-commerce.

* B2B stands for business-to-business, that is, businesses selling to and buying from other businesses. It contrasts with B2C or business-to-consumer.

  • Artificial Intelligence (AI)

AI, machine learning, and automation will also play a significant role, helping companies optimize customer retention and predict purchasing behaviors.

  • Sustainability

Global warming is an increasing concern and will continue to be a priority for consumers and businesses alike. As a result, eco-friendly subscription models are expected to rise significantly.

  • Media

In an article published by Forbes Magazine in December 2023, Falon Fatemi wrote the following regarding why the future of media is subscription-based:

“While the subscription-model has many benefits, and not needing to rely on advertising is certainly one of them, that is not the main reason that the future of media is subscription-based.”

“Customization, privacy and security controls, and a reliable revenue stream are the key reasons that we are seeing—and will continue to see—this business model boom.”

Final Thoughts

Let’s recap. In a subscription business model, the customer or subscriber pays a recurring fee at regular intervals for access to a product or service. The business model was pioneered by publishers in England in the 17th century.

Since then, it has expanded significantly across many industries, from media and e-commerce to SaaS and health services.

The model provides predictable revenue, fosters customer loyalty, and allows for long-term value creation.

However, there are challenges, such as customer churn, competitive markets, and managing operational logistics.

Looking ahead, trends like B2B subscriptions, personalization, and the rise of eco-friendly models will most likely shape the future.

Automation, AI, and data-driven insights will continue to optimize the subscription experience.

The subscription business model is poised for sustained rapid growth in the coming years, expanding its influence and becoming an even more integral part of the global economy than it already is today.